- Technical Analysis & Commentary -

October 22, 2010 (FinancialWire) (Investrend Forums Syndicate) (By Dr. Joe Duarte) (Entire post at http://www.investrendweblogs.net/jduarte/) (Go to http://www.financialwire.net/?s=cmmtry for all recent commentaries.) — Shares of 3M (NYSE: MMM) are worth watching, as the currency markets turn more volatile.

The U.S. stock market was in a steady momentum run prior to China's surprise interest rate increase on Monday. For investors, the key is to see whether the Chinese interest rate move has a lasting effect on both global stock markets and on the dollar.  The fact is that the U.S. stock market's rally has been fueled, at least in part by the lower dollar, which seems to be bottoming. That means that the action in the currency markets now becomes extremely significant to stock traders.

The initial reaction to the Chinese interest rate increase was strength in the dollar, and a negative effect on U.S. stock index futures and global stock markets. For its own part, China raised interest rates in order to stem inflationary pressures brought on by the aggressive monetary stimulus that it put in place after the subprime mortgage market imploded and its aftermath.

The dollar may strengthen in the short term, which is why shares of U.S. international conglomerates, such as 3-M are important. 3-M does a significant portion of its business beyond the U.S. And when the dollar falls, its shares tend to rise.

It's early in the transition, potentially from a weak dollar to a stronger dollar, or a less weak dollar. But it is possible that we have now seen the bottom in the dollar for the next few weeks, and perhaps months, as the market factored in the Fed's moves toward easing, and now believes that it may have overshot and thus the value of the dollar may not be as low as initially thougth. Now, the market will have to contend with the reaction from China, and perhaps elsewhere in the world with regard to the Fed's moves. That's why the next few days could be a bit shaky. As long as the S & P 500 holds above 1175, though, the up trend in U.S. stocks remains intact.

Tuesday’s S & P 500 took the index below 1175, but not the 20-day moving average.  The question now is how the Fed turns on the printing presses without having the dollar crash and burn, which is why Geithner is now talking up the dollar. The next sign is what comes out of the Fed with regard to the greenback. If Fed officials start talking up the dollar, it will be clear that they are talking up the dollar as they start the printing presses.

The action in 3-M will be important. If the stock holds up or starts climbing, it will suggest that the market is not expecting major dollar strength.

Source: Investrend Weblogs (http://www.investrendweblogs.net/).

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